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Which Fund Companies Are Really Thinking Long Term?

Fund managers say it pays to invest long term. So how often do they make trades in their funds?

Russel Kinnel, 10/17/2006

As the number of hedge funds has grown rapidly in recent years, mutual fund managers have been telling us that short-term trades have become less profitable. However, they say all that trading by hedge funds has created more opportunities for long-term investors. They say that investors with long time horizons should do quite well.

This made me curious to see just how far out typical fund managers at the largest mutual fund companies are looking. To do that I looked at the asset-weighted turnover average for domestic-stock funds in our nine Morningstar style box categories. Turnover of 100% means holding a stock for one year on average, while turnover of 20% means five years.

To be fair, turnover isn't entirely in a manager's control. Redemptions can drive turnover up, and mergers can take holdings out of a portfolio. Changes in market volatility can impact turnover, too.

Looking at turnover rates for the 20 largest fund companies, it struck me how great the differences are among fund shops. Even when they incorporate different styles and strategies, you'll often find a strong underlying philosophy about how often one should trade.

Consider the large-value funds from a few different companies. Typically, large-value funds run at fairly modest turnover, but American Century, which leans heavily on quantitative trading strategies, has two funds with turnover of more than 100% and two below 30%. By contrast, American Funds has four large-value funds all with turnover below 25%, and T. Rowe Price has two large-value funds and both have turnover below 25%.

So, let's take a look at the 20-largest fund companies broken up by implied time horizon.

 Fund Firms Ranked by Weighted Turnover
Family
Avg
Turnover
Davis Funds
6.71
Dodge & Cox
12.00
American Funds
19.08
Dimensional Investment Group
19.34
Vanguard
19.99
Franklin Templeton Investments
25.82
T. Rowe Price
27.12
Legg Mason Partners
34.58
Columbia
35.86
JP Morgan
47.56
Lord Abbett
49.05
Van Kampen
50.18
Aim Investments
53.62
Fidelity Investments
58.62
Janus
59.89
MFS
66.39
Hartford Mutual Funds
74.38
Putnam
74.60
OppenheimerFunds
80.37
American Century Investments
93.49
Data through September 2006

Fund Families with Lowest Turnover
Davis/Selected has an average turnover of about 7%. Davis is a long-term value investor, but the firm is in blend because it places heavy emphasis on finding the best management and waiting for a sell-off to get in at a decent price. You can also see its patience when something bad happens at a holding. Rather than window-dress its portfolios to get rid of the embarrassing pick, it will wait if the managers think the stock will rebound because the market overreacted.

Dodge & Cox checks in with turnover of just 12%. Everything about these guys says long term. The firm has been around since 1930, and it hasn't changed much over that time. The managers do solid fundamental research to unearth attractive values.

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